How Much Will The GOP's Medicaid Per-Capita Cap Save, If Anything? CBO Refuses To Say

WASHINGTON, DC - FEBRUARY 6, 1995: Then-President Bill Clinton addressed the conference of the National Governors' Association in Washington, DC. Clinton told the governors that their proposal to reform the Medicaid health care program for the poor, elderly and disabled was positive and constructive. (LUKE FRAZZA/AFP/Getty Images)

As the debate continues over Republican efforts to replace Obamacare, some of the most apocalyptic rhetoric from the left relates to the GOP’s effort at long-term entitlement reform: a per-capita cap on future Medicaid spending. But the Congressional Budget Office has refused to estimate exactly what the impact of the per-capita reform might be. Why?

The Democratic per-capita cap freakout

A specter is haunting America: the specter that Republicans may borrow an idea from former President Bill Clinton and tie the long-term per-enrollee growth of Medicaid spending to medical inflation.

Democrats and their allies in trade journals and think tanks are striving to exorcise this specter: “Can states survive the per capita Medicaid caps in the AHCA?” wonders Vernon K. Smith in Health Affairs.“GOP health plan could doom Medicaid managed care,” shrieks Virgil Dickson of Modern Healthcare. “The per capita cap in the AHCA, as proposed, could cut $734 billion from Medicaid between 2019 and 2028,” warn scholars from the Urban Institute, a liberal think tank.

There’s only one problem. The numbers these alarmists are using are factually wrong. Indeed, the per-capita cap in the American Health Care Act may not end up saving any money.

The CBO’s deafening Medicaid silence

The Congressional Budget Office has published three separate reports, totaling 89 pages, measuring the fiscal impact of the Republican health care bill on a line-by-line basis. In the most recent of the three reports, CBO estimated that the American Health Care Act will reduce federal spending by $1.1 trillion from 2017 to 2026, with $834 billion of that coming from the bill’s changes to Medicaid.

CBO identifies three provisions in the AHCA that drive the $834 billion in reduced Medicaid spending. The first is the AHCA’s repeal of Obamacare’s Medicaid expansion. The second is its repeal of Obamacare’s individual mandate, which the CBO implausibly believes will lead more than 5 million people to drop out of Medicaid. The third is the per-capita cap reform of the pre-Obamacare Medicaid program.

Remarkably, and unusually, the CBO has decided not to break out the relative effects of these three provisions onto the Medicaid reform: a silence that has led to massive confusion among states who falsely believe that their traditional Medicaid programs will be subject to massive cuts.

CBO appears to believe that it's too complicated to tease out the impact of the AHCA's various provisions on Medicaid, because they interact with each other. But CBO does analyses of interacting provisions all the time.

This is all we know about the CBO’s view of the impact of per-capita caps: that they will “reduce outlays.” But the essential question is: by how much?

How the AHCA’s per-capita cap would work

The Medicaid program has been traditionally broken into four demographically distinct populations: (1) elderly individuals who are also eligible for Medicare (“dual-eligibles”); (2) the blind and disabled; (3) children; and (4) able-bodied adults.

In 1995, President Clinton proposed capping per-enrollee spending growth for each of these groups at the same rate as real GDP growth. Clinton's proposal was estimated to reduce Medicaid spending by $54 billion over seven years, but was rejected by Republicans who preferred block grants. Sigh.

22 years later, Republicans have taken up Clinton’s proposal, but with a more generous growth rate: medical inflation, which is running at around 4 percent, compared to real GDP growth, which is running at around 2 percent these days.

Indeed, the AHCA would grow per-enrollee spending for elderly, blind, and disabled Medicaid beneficiaries at an even higher rate of medical inflation plus one percent (CPI-M+1).

CBO believes this would reduce federal spending, but it won’t say by how much:

The limit on federal reimbursement would reduce outlays because (after the changes to the Medicaid expansion population have been accounted for) Medicaid spending would grow on a per-enrollee basis at a faster rate than CPI-M [medical inflation], according to CBO’s projections: at an average annual rate of 4.4 percent for Medicaid and 3.7 percent for CPI-M over the 2017-2026 period.

The AHCA per-capita cap would reduce legacy Medicaid spending by 1.6 percent—or less

However, we can estimate the impact of the AHCA per-capita cap on the legacy (i.e., pre-Obamacare) Medicaid population by using data from the Centers for Medicaid and Medicare Services (CMS). CMS expects that the federal government will spend approximately $6.7 trillion on the legacy Medicaid program from 2017 to 2026.

If we apply CBO’s estimate of future medical inflation to the AHCA—which would thereby grow per-enrollee spending at 3.7 percent for children and able-bodied adults, and 4.7 percent for the elderly, blind, and disabled—we get to a spending reduction of $107 billion from 2017 to 2026.

$107 billion represents 13 percent of the CBO’s estimate of the AHCA’s Medicaid spending cuts. More importantly, it represents a paltry 1.6 percent of total federal spending on the legacy Medicaid program over that time frame.

This 1.6 percent cut is what progressives are calling the “radical” and “reckless” reform that could “doom” Medicaid insurers and threaten states’ “survival.” Come on.

Indeed, it may turn out that the impact of the per-capita cap is even smaller. The CMS chief actuary, Paul Spitalnic, in his 2016 annual report on the Medicaid program, projected that “medical price inflation is projected to be modestly faster after 2016 than in recent history—averaging 4.2 percent from 2017 through 2025, as compared to 3.1 percent over the prior 10 years.”

If Spitalnic is right, and the CBO is wrong, the AHCA’s per-capita cap will save almost nothing: $5 billion over the 2017-26 timeframe.

The Toomey-Portman Medicaid reform debate

Behind the scenes, Senate Republicans have been engaging in a knock-down drag-out argument over exactly how to reform the Medicaid program. The moderate wing, led by Ohio Sen. Rob Portman, is seeking to gradually phase in the AHCA’s repeal of Obamacare’s Medicaid expansion, while preserving the AHCA’s generous inflation rates for the legacy Medicaid program.

The conservative wing, led by Pennsylvania Sen. Pat Toomey, is okay with phasing in the Medicaid expansion, but wants a more robust reform for the long term, in the per-capita cap provision.

It’s unclear where the actual Senate bill will end up, but the wise choice would be to do a bit of what both Portman and Toomey want. Sure, phase in the repeal of the Obamacare Medicaid expansion, so that states have time to expand their private insurance markets to those near the poverty line. And we certainly should try to further slow down the growth of long-term Medicaid spending, while giving states the flexibility they need to implement those savings in a way that improves patient care.

Unlike the shambolic process in the House, Senate Republicans seem to be approaching reform in the right way: soliciting opinions from all corners, and trying to put the best bill forward. The good news is that they have the tools and the time to get this right.

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UPDATE: CMS has put out its own ten-year score of the House bill, the American Health Care Act. They estimate that per-capita caps will reduce Medicaid spending over 10 years by $64.9 billion, which amounts to less than one percent of total Medicaid spending over the same period under current law:

Centers for Medicare and Medicaid Services

According to CMS, putting Medicaid on a per-capita cap would reduce overall Medicaid spending by 1% over 10 years.